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Within the circle of investors in financial stocks, the most daring and astute trade in recent memory goes by the name “Citibank at 8”. In late 1991 the US was in recession and, as Citibank struggled with bad real estate loans, the shares slipped 77 per cent, to below $8 (equal to $2.50 today, after splits), and less than 40 per cent of book value. But by selling assets, cutting its dividend and raising fresh capital, Citi’s shares doubled in less than a year, reached the low $30s by late 1993 and by 1998 had soared more than tenfold.

Wishful investors in today’s credit crisis spurred financials into small rallies in January, April and July but the stocks have continued to wilt. There is no consensus: some traditional managers are buying with both hands and others watch eagerly from a safe distance, while the hedge fund world is net short, betting on further financial chaos.

Financial stocks around the world have responded to the ongoing crisis in credit and confidence by falling 30-40 per cent in the past year, or between two and three times the declines in the broader markets of the US, Europe and the world (down 11 per cent, 15 per cent and 13 per cent respectively, according to MSCI). The bottom chart plots the one-year history of the Financial Select Sector SPDR ETF that has become a popular vehicle for expressing points of view on US financials.

Worse yet, the massive write-offs of flawed assets do not mean the end of bad news: Goldman Sachs reports that Wall Street’s estimates for US financials are projected to fall 39 per cent in 2008 (following 2007’s 34 per cent drop). On five-year forward estimates, Goldman concludes that, despite their fall, the financials are the third most expensive sector in the US market, after utilities and materials.